MediPharm Labs (TSE:LABS) Has Debt But No Earnings; Should You Worry?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies MediPharm Labs Corp. (TSE:LABS) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for MediPharm Labs

How Much Debt Does MediPharm Labs Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 MediPharm Labs had CA$2.72m of debt, an increase on CA$1.29m, over one year. However, its balance sheet shows it holds CA$15.2m in cash, so it actually has CA$12.5m net cash.

A Look At MediPharm Labs' Liabilities

The latest balance sheet data shows that MediPharm Labs had liabilities of CA$12.7m due within a year, and liabilities of CA$1.83m falling due after that. Offsetting these obligations, it had cash of CA$15.2m as well as receivables valued at CA$14.7m due within 12 months. So it actually has CA$15.5m more liquid assets than total liabilities.

This surplus strongly suggests that MediPharm Labs has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that MediPharm Labs has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine MediPharm Labs's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year MediPharm Labs wasn't profitable at an EBIT level, but managed to grow its revenue by 39%, to CA$28m. With any luck the company will be able to grow its way to profitability.

So How Risky Is MediPharm Labs?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months MediPharm Labs lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$14m and booked a CA$19m accounting loss. Given it only has net cash of CA$12.5m, the company may need to raise more capital if it doesn't reach break-even soon. MediPharm Labs's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example MediPharm Labs has 4 warning signs (and 1 which is concerning) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.